The ECB announces the end of its purchase program -Report from today's ECB pressconference- by Thomas Seidel

Today's press conference took place in the Latvian capital of Riga
(Source: ECB-Webcast Thomas Seidel)

After more than 12 months of a de facto deadlock on monetary policy decisions, the European Central Bank announced today the long-awaited move to phase out the extraordinary buying program by the end of December 2018. Although this step was long expected by the professional public, this decision will lead to some significant changes in the medium term.

To anticipate, the decision to end the extraordinary purchase program comes with a handbrake therefore. As ECB President Mario Draghi told journalists at the press conference, a purchase program has become a standard monetary policy instrument of a central bank and can be re-used at any time. Specifically, after September 2018, the volume of purchases is to be reduced to € 15bn per month and then suspended for the time being from January 2019. All key interest rates remain unchanged until further notice.

ECB-President announces the stop of the purchase program
(Source: ECB-Webcast Thomas Seidel)

However, stopping the purchase program does not mean that the promissory note issuers now have to repay their debts when due. Most issuers would not be able to do that either. Therefore, the ECB in its current resolution formulates, that it will reinvest in the maturing bonds! That's important, because that means issuers pay for a bond that matures by placing a new one. Thus, the stock of purchased bonds at the ECB and thus its balance sheet total from these transactions remains initially unchanged. This applies without further time limit. In any case, one wants to prevent a narrowing of liquidity. In other words, the ECB has just decided not to continue to grow the mountain of purchased bonds!

The reason given by the ECB for its decision is, its essential goal of an inflation rate just under two percent has been achieved. It is currently estimated at 1.9 percent inflation and expects this level to more or less continue until 2020. The economy is recovering, general wage levels are rising and lending to companies and households is showing growth of around three percent.

The new ECB-Vicepresident Luis de Guindos talks about details
(Source: ECB-Webcast Thomas Seidel)

Mario Draghi encounters all sceptic. One would not see a denomination risk with government bonds. The parliamentary election in only one out of 19 countries should not be dramatized. The economic progress made in recent years must not be talked down. The EURO is an irrevocable institution, very strong and is demanded. On discussions that are led against the EURO by some and the view of the German economist Clemens Fuest, there should also be an exit option from the EURO, Mario Draghi is charmingly not replying to even one.

The criticism that the ECB's persistently low interest rates would help to reduce the assets of savers is not being accepted by Draghi. For an investment there would be good profitable alternatives and pension funds would show that even in times of very low interest rates still good alternative returns can be achieved.

The press-conference is being enriched by the questions from journalists
(Source: ECB-Webcast Thomas Seidel)

Effects of changing conditions to the global economy, for example due to customs duties, can not yet be determined at the moment, because some of these measures are not yet in force. Criticism from Italy, in the month of May, the ECB had bought less Italian bond as usual, is being refused by Draghi. In addition to Italy, the purchasing volume of France, Belgium and Austria was also lower than in other months before. Draghi makes it clear, that a conspiracy against Italy would not take place.

The ECB has taken a lot of time with its decision to end the extraordinary purchase program, at least in terms of the timetable compared to the US Federal Reserve System, the local central bank for the US dollar. Ten years after Lehman and in its twentieth year, the ECB's signal is important that in the meantime a certain normality has re-emerged in Europe and the EURO area. How long this normality will last, nobody can foresee. Despite all economic recovery, European politics has not used time or done any of their homework. Instead, the national protectionist forces are increasing. In less than nine months, Brexit is just around the corner. No one knows until today how the English bet will turn out. Likewise, we do not know what the consequences are for the European economy and thus for the decision-making basis of the ECB.